Your everyday price manipulation
In financial markets, price manipulation is illegal. In supermarkets, it is considered good business. We all know that supermarkets and other retailers tend to sell products at prices that end in the digit 9. Instead of selling a pack of crackers for $2.00, the supermarket tends to price it at $1.99. The reasons for this tendency are many. Historically, the fractional prices were used by shopkeepers to force their clerks to go to the till and register the sale to get change. Otherwise, they would just approach the customer in the store, take his or her money right there and hand them the change while pocketing the sale for themselves. With the introduction of fractional prices, this practice of skimming sales became more difficult.
Today, most people think that prices ending in 9 are used because they appear lower to the customer. Since in the Western world we are used to reading from left to right, a price of $2.00 will start with a two while $1.99 starts with a 1 and thus anchors our perception of the price at a lower level. Hence, we think that supermarkets think about the price they want to charge and then simply subtract a penny to come to the ticketed price. The lost profit of $0.01 per item is supposedly more than made up for by higher sales volumes.
But, you’d be wrong.
Avichai Snir and Daniel Levy looked at the prices charged by a Chicago supermarket chain from 1989 to 1997. They collected a massive 98.9 million prices for 18,036 products, the majority of which – unsurprisingly – had prices ending in 9. What they found was that in the beginning, products with prices ending in 9 were marginally cheaper than products with round or other prices. However, over time, supermarkets learned that instead of starting with a round number and then subtracting a penny they could just as well add 9 pence. And gradually, products with prices ending in 9 became more and more expensive compared to other products – a development that went unnoticed by customers. They simply kept on buying these products assuming that they are cheaper. By 1997 the shift was so extreme that on average, products with prices ending in 9 were 18% more expensive than products with round prices.
The lessons we learn from this research are simple:
Financial markets are better regulated and policed than supermarkets. In fact, supermarkets are lawless places.
Retail entrepreneurs are worse than hedge fund managers.
Even if we think we know we are being tricked by supermarket pricing strategies, they are already one step ahead of us.
Buy in bulk. It’s cheaper.
Retail price of Nabisco Wheat Thins Low Salt from 1989 to 1997
Source: Snir and Levy (2019).